Vanguard VOO ETF [Complete Review]
Vanguard S&P 500 Index Fund (ETF:VOO) is one of the best S&P 500 ETFs available. In this review, we’ll take a look at the fund performance (share—not stock—historical price, holdings, dividends, expense ratio and tax efficiency), and the alternatives (VOO vs. SPY, VOO vs. IVV, VOO vs. VFINX Admiral shares, VOO vs. VTI and VOO vs. VXF) available to individual investors. A low fee and a well-constructed benchmark make VOO well-positioned to continue to produce solid risk-adjusted returns over the long haul. What is Vanguard VOO? Vanguard VOO invests in stocks of the S&P 500 Index, representing 500 of the largest US companies. It offers investors diversified exposure to US large-cap stocks. The objective is to closely track the index’s return, which is considered a gauge of the overall US stock market. Who is VOO appropriate for? Index funds such as VOO are ideal for individual investors wanting to get a broad exposure to the US market. VOO is a good fit for long-term investors, for whom money’s growth over a longer period of time is essential. Conversely, it may not be the right fit for short-term investors (e.g., those looking to hold a position less than a year). How do we rate VOO? We don’t assign star ratings, such as Morningstar, but rather guide individual investors to make a decision based on their investment goals, experience and knowledge of the market. If you’re a novice in investing, and you’re looking for a broad exposure to the US market, you should give this fund a shot. We give it a triple green.
Reasons for a triple-green? VOO: 1. Offers diversified exposure to U.S. large-cap stocks; 2. Has a very low expense ratio, 0.04%; 3. Has historically done well. A low fee and a reasonably representative portfolio make the fund well-positioned to do well in the future.
A word of caution—a triple green doesn’t mean you should invest in the fund now. It has to be right for you. Also, we have no idea what the future will look like for VOO—and whether S&P 500 is overvalued at this point. What do I need to know about S&P 500? S&P 500 covers approximately 80% of the investable US equity market (by market capitalization). The stocks comprising VOO are weighted by their capitalization, so Alphabet (GOOGL) and JPMorgan Chase (JPM) carry more weight than Biogen (BIIB) and Blackrock (BLK). Currently, there are a lot of tech and financial services companies in S&P 500. S&P 500 is managed by a committee (not rules). S&P 500 stocks must pass profitability screens before they can be added to the index. But that does not mean that the index will have better performance. When the committee decides to add or drop a stock, that can significantly move the stock price. In 2010, S&P announced Berkshire Hathaway (BRK.A) would be added to the index, so the stock price appreciated more than 10% over the next week or so. Does VOO give investors international exposure? Many of the fund’s largest holdings are multinational firms, so VOO has substantial indirect international exposure. About half of S&P 500 companies’ revenue is generated outside of the US. There are so many S&P index ETFs. What are some of the good choices to choose among? Among the ETFs there are a few that track very closely to the index and have a low expense ratio: • • •
IVV: iShares Core S&P 500 ETF; expense ratio is 0.04%; SPY: SPDR S&P 500; expense ratio is 0.09%; SCHX: Schwab U.S. Large-Cap ETF; expense ratio 0.03%. This is technically not an S&P 500 fund, but it does track closely to the index.
You can trade IVV commission free on Fidelity, assuming you have a Fidelity account. A short-term trading fee of $4.95 is charged for any sales that occur within 30 days of the original purchase of the ETF. Schwab charges 0.03% for SCHX. Since this is an ETF, there could be a commission you may have to pay for the trade. If your broker is Schwab, you can trade SCHX commission free. VOO vs. IVV? Which ETF should I choose? IVV is many ways similar to VOO: its expense ratio is also 0.04%, and its returns are vary comparable to VOO’s. If Vanguard is your money manager, you should go with VOO. If you keep your money at Fidelity, which will let you buy IVV commission free, go with IVV.
VOO vs. SPY? Which ETF should I choose? SPY is the oldest ETF. It’s been trading since 1993. Since then, SPY has become one of the largest and most-widely traded securities in the world. SPY has traditionally been the largest S&P 500 fund by assets, but VOO has surpassed SPY recently. SPY is now the second large fund by assets, standing at $237 Billion. SPY’s expense ratio is slightly above VOO’s: 0.09% vs. 0.04%. In terms of performance, VOO returned slightly more than SPY over the last five years. But for most investors, the difference is negligible.
VOO is also more tax efficient than SPY. VOO’s tax cost ratio (return reduction because of taxes investors pay on distributions) is 0.50%. SPY’s tax cost ratio is 0.92%. SPY has one big advantage for investors employing complex strategies that include options. SPY replicates the S&P 500 benchmark with near perfection, which investors utilize for option trading. SPY offers an incredibly-liquid options market and is a great tool for investors looking to execute intra-day trades or those with short holding periods. But for most retail (individual) investors, VOO may be a slightly better pick, because of lower cost and better tax efficiency.
VOO vs. VFINX? Which fund should I choose? VFINX investor share class (VFINX) has a 0.14% annual expense fee and requires a $3,000 initial purchase.
VFINX is a mutual fund, which means its price changes once a day. But for most consumers who invest long-term, it doesn’t really matter how often you trade in any given day. The historical VFINX performance is slightly lower than VOO’s. That’s because its expense ratio is 0.1 percentage points higher than VOO’s. VOO does not have a minimum investment requirement. VFINX does—it’s $3,000. VFINX will make it easier for you to re-invest dividends. But it’s also less tax efficient compared to VOO (meaning, you’ll pay more taxes on average if you go with VFINX vs. VOO). Our recommendation—unless you have $10K to invest in VFINX Admiral shares, which have an expense ratio of 0.04%, find a zero-cost brokerage (e.g., Vanguard for Vanguard funds) and go with VOO. What should I know about ETFs vs. mutual funds when I choose between VOO and VFINX/VFIAX (aside from performance and costs)? Mutual funds allow automatic investing and you can buy fractional shares. So you may decide to invest $500 per month into a mutual fund. You can set it up to be done automatically from your bank account. Mutual funds allow you to automatically reinvest dividends and capital gains. ETFs do not.
ETFs trade like a stock, so you can't buy fractional shares. You can manually add a certain amount, but the exact amount will depend on the share price at that moment. ETFs are more tax-efficient. You have more control over when a taxable event gets triggered. This is particularly useful in a taxable account. VOO has a lower tax-cost ratio (0.5%) than VFINX (0.67%).
The tax cost ratio shows you by how much the effective return is reduced as a result of investors paying taxes on distributions. VOO vs. VTI? Which ETF is better? VTI tracks the performance of the CRSP US Total Market Index (over 3,000 stocks), while VOO invests only in S&P 500 stocks. The Total Market Index contains the S&P 500, so owning both funds weights you more heavily in the S&P 500. Both funds have the same expense ratio, 0.04%.
Those two ETFs have similar performance, although VOO returned slightly more in the last 5 years.
The choice is really up to youâ€”do you want exposure to S&P 500, or a broader basket of stocks, representing the total US market? VOO or VXF? Should I invest in the combination of those two funds? VXF tracks the performance of a benchmark index that measures the investment return of stocks from small and midsize companies. Think of it as all US stocks except those in the S&P 500 Index. VXF is often purchased in combination with VOO, so investors can control exposure to large vs. medium and small companies in the US stock market.
Bear in mind that VXF has an expense ratio of 0.08%, and it returned slightly less than VOO in the last five years.
Are there cheaper S&P 500 / large cap ETFs than VOO? Yes. Schwab US Large-Cap ETF (SCHX) charges 0.03% for SCHX. This expense ratio applies to all investors, whether they invested $100 or $100,000. Bear in mind that the standard industry practice is to charge less to clients who invested more with them. SCHX is contains more stocks than S&P 500. The fund invests in 771 large-cap stocks, and the overlap with S&P 500 is significant. What is VOO turnover? And does turnover really matter? VOO turnover is 4%, as opposed to the average of 58% for large-cap ETFs. Lower turnover equates to lower costs and smaller taxable capital gains distributions, so it is important. What is VOO historical performance? Here is the 5-year share performance chart.
VOOâ€™s 5-year annualized return is 13.97%. VOOâ€™s 3-year annualized return is 10.59%. This performance is stellar, and you should not expect similar returns by design going forward.
The fund generates its edge from its low cost. What is VOO dividend? VOO dividend yield is 1.97%. If you invest $1000 in VOO, expect to be paid $1.97 in dividends. VOO dividends stem from the underlying stocks and are distributed quarterly. Great about dividends. Do I have to pay taxes on those? Generally yes, unless you’re using a tax-deferred account (e.g., 401K) in which case you’ll be taxed later (e.g., when you retire). What are VOO’s top holdings? The top 10 holdings and their percentage weights in VOO are as follows: Company Apple (AAPL) Alphabet (GOOGL) Microsoft (MSFT) Amazon.com (AMZN) Facebook (FB) Exxon Mobile (XOM) Johnson & Johnson (JNJ) Berkshire Hathaway (BRK.B) JPMorgan Chase (JPM) General Electric (GE) Those top 10 assets account for 19.8% of fund’s performance, which is pretty concentrated because of the market cap weights. These 10 assets would account for 2% of an equal weight S&P 500 fund. Are there any segments of the US stock market that have historically performed better than VOO / S&P 500 over a long run? Yes. If you look at the last 87 years of the US stock market (since 1930), you’ll notice that both small cap value and large cap value categories have done arguably better than S&P 500 (VOO, IVV or SPY) or Vanguard’s Total Stock Market Index (VTI). Over a shorter period of time, there is always a number of categories / funds that have performed better than S&P 500. How can I find out the funds that have done better than S&P 500 index ETFs (VTI)? You can get some suggestions on what ETFs have outperformed VOO through Finstead’s Idea tool. The tool pops out a couple of ETF suggestions (from both the same fund category and overall) that have historically had a higher expense adjusted return and lower volatility (i.e., risk). For VOO, the Finstead idea tool suggests Dow Jones High Yield Select 10 Total Return Index ETF (DOD) and iShares Morningstar Large-Cap ETF (JKD) as an overall fund and the same
category fund (respectively) that have had a higher return and lower volatility over the last 5 years. But be careful—do your diligence before investing in those funds! Who manages VOO? And are they doing a good job? Donald Butler and Scott Geiger are VOO fund managers as of April 2016. Did VOO managers also invest their own money in the fund? No, but that should not be a concern for. Vanguard compensates their managers based on operating efficiency. The managers are incented to keep costs low and minimize tracking errors. Vanguard has automated much of this investment process and provides the managers with tools to handle flows, corporate actions, and benchmark changes. What should I know about Vanguard? Vanguard is one of the most powerful retail investment houses. It has excellent products for individual investors. Its messages to investors are to keep costs low, diversify, and practice investment discipline. Vanguard’s fund holders own the firm through small investments by each mutual fund, and the firm is known for periodic cost cutting for mutual funds and ETFs. Is Vanguard becoming more profitable? We don’t know that—Vanguard is privately held. You might have heard about Vanguard attracting new inflows. That happened because of its aggressive cost cutting measures for individual funds and the emphasis on index investing (as opposed to actively managed funds). The one thing we know is that Vanguard is gaining market share. Today it has over 20% market share across US mutual funds. What other questions are on your mind? Send us your thoughts to: hi@ finstead.com.
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